Search for Savings: How to Work with the GSA

Rising rental rates are making it more difficult to structure lease renewals in many markets. But the General Services Administration’s Public Buildings Service has an even tougher challenge. When the organization, which handles both leased and owned space for federal agencies, needs either a new lease or an expansion, it

Rising rental rates are making it more difficult to structure lease renewals in many markets. But the General Services Administration’s Public Buildings Service has an even tougher challenge. When the organization, which handles both leased and owned space for federal agencies, needs either a new lease or an expansion, it is federally mandated to look first at buildings that it already owns.That was the case when it needed to consolidate the space used by the Department of Homeland Security, which occupies 60 locations in Greater Washington, D.C. For example, St. Elizabeth’s Hospital’s West Campus in Southeast D.C. will house 4 million square feet of the department’s space, saving taxpayers $750 million over 30 years, according to Public Buildings Service commissioner David Winstead. The GSA determined that this arrangement would be more cost effective than operating many headquarters locations or moving Homeland Security into leased space in the city’s central business district and surrounding submarkets.That made the job easier for brokers working on the deal, but it prevented any other owners from a shot at signing the agency. Such is the life of commercial real estate companies that work with the GSA: Meeting its new-space needs can be both daunting and rewarding.In office markets like Washington, D.C., that have higher rental rates, “the maximum rental rate lags behind the market,” said Neil Levy, executive managing director of Studley Inc.’s local office, referring to the GSA’s approximately $2.6 million cap on the term of a lease. Congress must approve any transaction that surpasses that amount, so some federal agencies with large leases have begun to consider emerging submarkets in order to keep costs down. In fact, proposals for buildings on the fringes of emerging areas are more likely to win procurements today, according to Kurt Stout, a senior vice president for Grubb & Ellis Co.’s D.C., office.That may be the best pricing alternative for the GSA. By executive order, the administration must seek space in a city’s central employment area, which is larger than a CBD, also incorporating emerging markets, Levy noted.Though brokers often include core Downtown properties on their lists of potential locations for the GSA, such buildings may well price themselves out of the competition, even without a cap, he said. “Many, but not all, federal procurements are completed solely on the basis of price,” he said.In D.C., for instance, the Department of Justice inked a 15-year, 521,000-square-foot lease in March in the Two Constitution Square development, now being developed on N Street in the emerging NoMa submarket. Rental rates for Class A space there averaged $44.98 per square foot in the second quarter while similar space went for $49.50 in the CBD, according to GVA Advantis.Beyond price, though, the GSA must consider when leasing new space whether it meets the requirements of the prospective occupant, including such basic elements as amenities—like restaurants and dry cleaners, Levy noted. The GSA generally will not consider a new project without proof that a minimum threshold of amenities will be available, a tendency that has benefited lagging submarkets, forcing the creation of amenities.A federal agency can also impact a project’s design. Constitution Square’s initial design, presented in February 2006, encompassed a seven-acre site that had zoning rights for 3 million square feet, including northern and southern office portions and 350,000 square feet speculatively planned for a grocery store and residential space. “At that time, it was unclear whether GSA was going to waive its requirements for a setback,” said Doug Firstenberg, principal for Stonebridge Carras, which is developing the project along with Walton Street Capital L.L.C. The GSA’s later solicitation of offers to house the Department of Justice put aside that security requirement. That enabled the developers to increase the size of the office component from 1 million square feet to 1.6 million square feet, boosting the daily population density and yielding benefit for potential retail tenants.And, of course, not all federal agencies fit in with other tenants. Joseph Delogu, a managing director for Jones Lang LaSalle Inc.’s Washington, D.C., office, noted that fellow tenants that attract a lot of foot traffic may not mesh with a federal agency’s security requirements. And a law facility, especially one that houses a detention center, does not fit in a multi-tenant property.Ultimately, some landlords prove more willing than others to accept and adapt to the tight security requirements and other needs set forth by the GSA, observed Chris Roth, a vice president for Jones Lang LaSalle’s D.C. office. To be in the running, landlords need to respond appropriately. Thus brokers must walk the landlord through the process. “It’s challenging to (put together) a compliant offer,” he explained.“Being a developer and landlord for a GSA building requires a totally different mind-set, from structuring deals to putting them in place,” Firstenberg said. For instance, Opus Corp. vice president of government programs Tom Olmstead noted that his firm’s ability to build faster and cheaper—in line with a Public Buildings Service goal—has led to a long-term relationship with the organization. Opus developed the LEED silver-certified, 587,000-square-foot Social Security Administration building in Downtown Birmingham, Ala.Still, developing buildings for the GSA does come with challenges. Olmstead noted that security requirements continue to change “as the world gets rougher,” and the federal agency that will occupy the space has the most impact on a project’s progress. Some tenants are slower to make decisions, and as the prices for raw materials rise—the price of steel rose more than 20 percent from June 2007 to December, for example—the project costs go up.For more on the GSA’s Public Buildings Service, visit here.